Do a railroad-debris salvage company's sorting equipment, rock crusher, tie-assembly operation, and highway trucks qualify for New York's production-machinery sales tax exemption?

Plain-English summary

Ray's Transportation removes railroad ties, steel, and concrete debris from railroad construction sites for railroad companies and contractors, hauling the material to its own yard in "boom trucks." At the yard, skid steers and front-end loaders sort usable material from scrap, usable ties get strapped into saleable bundles, and unusable material gets discarded. Ray's also pre-plates (assembles) new railroad ties with plates and spikes — sometimes ties it purchased itself for resale, sometimes ties supplied by a customer — and it runs a material handler and rock crusher that turn salvaged concrete into saleable crushed stone.

New York's production-machinery exemption requires equipment to be used "directly and predominantly" (over 50% of the time) in actually manufacturing, processing, or assembling a product for sale. The Department found that merely sorting and segregating scrap into usable and unusable piles — without changing its nature, shape, or form — is NOT processing, so Ray's skid steers and front-end loaders don't qualify for that sorting work. But the SAME equipment loading concrete into the rock crusher IS a production activity, so the skid steers/loaders need a predominant-use showing across their MIXED tasks (sorting scrap vs. loading the crusher) to qualify at all. The material handler and rock crusher themselves DO qualify as production equipment (crushing concrete into crushed stone is genuine processing), again subject to the over-50%-of-use test. Assembling railroad ties is production too — whether Ray's is assembling ties it purchased for resale, or ties a customer supplies for resale by that customer — but assembling a contractor's ties destined for installation as a capital improvement does NOT count as production for sale. Finally, the boom trucks that haul materials over public highways from job sites to the yard never qualify, because highway transportation is categorically excluded from "production" under a controlling Court of Appeals decision.

If Ray's already paid sales tax on qualifying equipment, it can apply for a refund or credit using Form AU-11 within three years of the tax becoming payable.

What this means for you

Scrap dealers, salvage yards, and recyclers with mixed sorting/processing operations

Sorting alone — segregating good material from bad without changing its form — doesn't qualify for the production exemption, even on equipment that also does genuine processing elsewhere in your operation. You need to track and substantiate that qualifying equipment spends more than half its time on the actual processing/assembly activity, not just point to the fact that processing happens somewhere in your yard.

Businesses that both haul and process materials

Highway-registered trucks that haul materials from job sites are never exempt production equipment, no matter how central hauling is to your business model — that's settled by New York's highest court. Keep your production-equipment exemption claims focused on stationary or yard-based processing machinery.

Accountants and tax professionals

This ruling and its companion, TSB-A-07(3)S (which cites this exact opinion for the same recycler's rock-crusher analysis), are a matched pair worth reading together for any construction-debris or scrap-recycling client — both apply the identical "predominantly for sale, not for discard" test to rock-crushing equipment.

Common questions

Q: Does sorting scrap into usable and unusable piles qualify for the production-machinery exemption?
A: No — sorting alone, without changing the material's nature, shape, or form, isn't processing.

Q: Does crushing concrete into crushed stone qualify?
A: Yes, as a processing activity, but only if the equipment is used more than 50% of the time for that purpose.

Q: Are highway trucks that haul debris to my yard ever exempt production equipment?
A: No — courts have held that highway transportation is never "direct" production, regardless of how integral it is to the business.

Q: Can I get a refund if I already paid tax on qualifying equipment?
A: Yes, by filing Form AU-11 within three years of the date the tax was payable.

Citations and references

Statutes and regulations:

• Tax Law § 1105(c)(2) (producing/fabricating/processing services)
• Tax Law § 1105-B (production-related parts/tools/supplies exemptions)
• Tax Law § 1115(a)(12) (production machinery/equipment exemption)
• Tax Law § 1139(a) (refund/credit procedure)
• 20 NYCRR 527.4(b)-(d), 528.13

Prior rulings/cases referenced:

• Lindemann Recycling Equipment, Inc., TSB-A-89(3)S
• O.W. Hubbell & Sons, Inc., TSB-A-04(22)S
• Vigliotti Recycling Corp., TSB-A-90(58)S
• St. Joe Resources Co. v New York State Tax Commn., 72 NY2d 943 (1988)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/sales_ao_2006.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/sales/a06_34s.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-06(34)S
Sales Tax
December 29, 2006

Office of Tax Policy Analysis
Technical Services Division
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. S060511A

On May 11, 2006, the Department of Taxation and Finance received a Petition for
Advisory Opinion from Ray’s Transportation, Inc., 360 Walsh Avenue, New Windsor,
New York 12553. Petitioner, Ray’s Transportation, Inc., provided additional information
pertaining to the Petition on August 4, 2006.
The issue raised by Petitioner is whether any of its equipment or trucks qualify as
production equipment pursuant to section 1115(a)(12) of the Tax Law.
Petitioner submits the following facts as the basis for this Advisory Opinion.
Petitioner provides construction debris removal services to railroad companies and
railroad contractors. Petitioner removes railroad ties and other railroad materials (steel and
concrete) from railroad construction sites to Petitioner’s yard. Petitioner takes title to the
materials it removes from the construction sites. At Petitioner's yard, the materials are unloaded
from Petitioner's trucks, sorted into usable and unusable items, and sold if usable or recyclable,
or discarded if not usable or recyclable. When enough usable salvaged railroad ties are
collected, they are strapped together (packaged) for sale. Unusable ties are discarded. Steel
items may be salvaged for sale or sold as scrap. Concrete may be further processed for resale as
described below.
Petitioner also pre-plates (assembles) new railroad ties with plates and spikes.
Depending on its contract, Petitioner may purchase ties that it will assemble and resell or may
assemble ties furnished by its customer.
Petitioner also operates trucks known as “boom” or “logging” trucks (hereinafter boom
trucks). These boom trucks are capable of picking up material such as railroad ties, steel rails,
scrap steel and scrap concrete and either loading the materials onto themselves or other trucks for
transport to Petitioner's facility. The boom trucks operate on the highways and go to different
construction sites to load materials to transport to Petitioner's yard. Once material is brought to
Petitioner's yard, Petitioner uses its skid steers and front end loaders to sort, grade, and stack
material. Some of the material is inventory for sale and some is scrap. The scrap is loaded onto
Petitioner's trucks to be sold for recycling or taken to a facility for disposal.
Petitioner also has a material handler machine and a rock crusher. The material handler
breaks up large pieces of concrete and loads them into the rock crusher. Once the concrete has
been processed through the rock crusher, it can be sold as crushed stone. The material handler
and crusher may also be used to process other non-concrete debris that is ultimately discarded by
Petitioner.

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Sales Tax
December 29, 2006

Applicable law and regulations
Section 1105 of the Tax Law provides, in part:
On and after June first, nineteen hundred seventy-one, there is hereby imposed
and there shall be paid a tax of four percent upon:
(a) The receipts from every retail sale of tangible personal property, except as
otherwise provided in this article.
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(c) The receipts from every sale, except for resale, of the following services:
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(2) Producing, fabricating, processing, printing or imprinting tangible personal
property, performed for a person who directly or indirectly furnishes the tangible
personal property, not purchased by him for resale, upon which services are performed.
Section 1105-B of the Tax Law provides:
Exemptions for certain parts, tools, supplies and services relating to tangible
personal property used or consumed in production. . . . (a) Receipts from the retail sales
of parts with a useful life of one year or less, tools and supplies for use or consumption
directly and predominantly in the production of tangible personal property, gas,
electricity, refrigeration or steam for sale by manufacturing, processing, generating,
assembling, refining, mining or extracting shall be exempt from the tax imposed by
subdivision (a) of section eleven hundred five of this article.
(b) Receipts from every sale of the services of installing, repairing, maintaining
or servicing the tangible personal property described in paragraph twelve of subdivision
(a) of section eleven hundred fifteen of this article, including the parts with a useful life
of one year or less, tools and supplies described in subdivision (a) of this section, to the
extent subject to such tax, shall be exempt from the tax on sales imposed under
subdivision (c) of section eleven hundred five of this article.
(c) Parts with a useful life of one year or less, tools and supplies described in
subdivision (a) of this section and services described in subdivision (b) of this section
shall be exempt from the compensating use tax imposed by section eleven hundred ten of
this article.
Section 1115(a) of the Tax Law provides, in part:

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Sales Tax
December 29, 2006

Receipts from the following shall be exempt from the tax on retail sales imposed
under subdivision (a) of section eleven hundred five and the compensating use tax
imposed under section eleven hundred ten:
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(12) Machinery or equipment for use or consumption directly and predominantly
in the production of tangible personal property . . . for sale, by manufacturing, processing,
generating, assembling, refining, mining or extracting, but not including parts with a
useful life of one year or less or tools or supplies used in connection with such machinery
or equipment. . . .
Section 1139 (a) of the Tax Law provides, in part:
In the manner provided in this section the tax commission shall refund or credit
any tax, penalty or interest erroneously, illegally or unconstitutionally collected or paid if
application therefor shall be filed with the tax commission (i) in the case of tax paid by
the applicant to a person required to collect tax, within three years after the date when the
tax was payable by such person to the tax commission as provided in section eleven
hundred thirty-seven . . . . Such application shall be in such form as the tax commission
shall prescribe. . . .
Section 527.4 of the Sales and Use Tax Regulations provides, in part:
Sale of services of producing, fabricating, processing, printing or imprinting.
(a) Imposition. (1) Section 1105(c)(2) of the Tax Law imposes a tax on the
receipts from services of producing, fabricating, processing, printing or imprinting
tangible personal property, performed for a person who directly or indirectly furnishes
the property.
(2) The enumerated services are not taxable when:
(i) purchased for resale; or
(ii) performed on property intended for resale.
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(b) Producing. Producing means the manufacture of a product from one or more
raw materials and any process in which a raw material loses its identity when the
production process is completed.

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Sales Tax
December 29, 2006

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(c) Fabricating. Fabricating is the alteration or modification of tangible personal
property to the specifications of the purchaser of the service, without changing the
identity of the property. . . .
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(d) Processing. Processing is the performance of any service on tangible personal
property for the owner which effects a change in the nature, shape, or form of the
property.
Section 528.13 of the Sales and Use Tax Regulations provides, in part:
(a) Exemption. (1) Exemption from statewide tax. An exemption is allowed from
the tax imposed under subdivisions (a) and (c) of section 1105 of the Tax Law, and from
the compensating use tax imposed under section 1110 of the Tax Law, for receipts from
sales of the following:
(i) Machinery or equipment (including parts with a useful life of more than
one year) used or consumed directly and predominantly in the production for sale
of tangible personal property . . . by manufacturing, processing, generating,
assembling, refining, mining or extracting. . . .

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(b) Production. (1) The activities listed in paragraph (a)(1) of this section are
classified as administration, production or distribution.
(i) Administration includes activities such as sales promotion, general
office work, credit and collection, purchasing, maintenance, transporting,
receiving and testing of raw materials and clerical work in production such as
preparation of work, production and time records.
(ii) Production includes the production line of the plant starting with the
handling and storage of raw materials at the plant site and continuing through the
last step of production where the product is finished and packaged for sale.
(iii) Distribution includes all operations subsequent to production, such as
storing, displaying, selling, loading and shipping finished products.

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Sales Tax
December 29, 2006

(2) The exemption applies only to machinery and equipment used directly and
predominantly in the production phase. Machinery and equipment partly used in the
administration and distribution phases does not qualify for the exemption, unless it is
used directly and predominantly in the production phase.
(3) The determination of when production begins is dependent upon the procedure
used in a plant. If on receiving raw materials, the purchaser weighs, inspects, measures or
tests the material prior to placement into storage, production begins with placement into
storage, and the prior activities are administrative. If the materials are unloaded and
placed in storage for production without such activities, the unloading is the beginning of
production.
Example 1: A crane is used to unload raw materials, which are immediately
placed in storage at a plant. From the storage site, the material is placed on an assembly
line without testing. The crane is being used in production.
Example 2: Testing equipment used to test incoming materials is not used in
production and is subject to tax.
(4) Production ends when the product is ready to be sold.
Example 3: A food processor sells canned food in cases of 48 cans. The canned
food is stacked for later labeling and casing. The line of production is deemed to extend
through the labeling and casing operation.
(c) Directly and predominantly. (1) Directly means the machinery or equipment
must, during the production phase of a process:
(i) act upon or effect a change in material to form the product to be sold,
or
(ii) have an active causal relationship in the production of the product to
be sold, or
(iii) be used in the handling, storage, or conveyance of materials or the
product to be sold, or
(iv) be used to place the product to be sold in the package in which it will
enter the stream of commerce.
(2) Usage in activities collateral to the actual production process is not deemed to
be used directly in production.

-6TSB-A-06(34)S
Sales Tax
December 29, 2006

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Example 7: Trucks which are required to be registered with the Department of
Motor Vehicles used to transport raw materials from a pit to a processing plant over a
public road are not used directly in production.
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(4) Machinery or equipment is used predominantly in production, if over 50
percent of its use is directly in the production phase of a process.
Opinion
Petitioner provides construction debris removal services to railroad companies and
railroad contractors. Petitioner recycles some of the materials it removes. Petitioner uses its
boom trucks to pick up debris (i.e., railroad ties, scrap steel and concrete) from railroad
construction sites and deliver it to Petitioner’s yard. Once the debris is unloaded at Petitioner's
yard, Petitioner uses skid steers and front end loaders to sort, grade and stack the debris into lots
of usable materials that may be resold or recycled, and unusable material to be discarded.
Petitioner also pre-plates or assembles new railroad ties. Depending on its contract with
a customer, Petitioner may either assemble ties it has purchased or assemble ties provided to it
by the customer.
Section 1115(a)(12) of the Tax Law exempts from sales and use tax the sale or use of
machinery or equipment used directly and predominantly in the production of tangible personal
property for sale by manufacturing, processing, generating, assembling, refining, mining, or
extracting. Producing is defined in section 527.4(b) of the Sales and Use Tax Regulations as the
manufacture of a product from one or more raw materials or any process in which a raw material
loses its identity when the production process is completed. Processing is defined in section
527.4(d) of the Sales and Use Tax Regulations as the performance of any service on tangible
personal property which effects a change in the nature, shape, or form of the property. Except
for the scrap concrete described in this Opinion, Petitioner does not appear to be engaged in
production for sale by processing or any of the other activities listed in section 1115(a)(12) with
respect to the materials it collects from railroad construction sites. Rather, Petitioner merely
sorts through the debris and separates usable items from those that are unusable. For example,
Petitioner collects scrap railroad ties from one or more railroad construction sites and uses its
own trucks to deliver them to its yard. The individual ties are either usable as is or are discarded.
Petitioner uses its skid steers and front end loaders to segregate the railroad ties into categories
and stack them accordingly. When enough usable ties are collected, they are strapped together
(packaged) for sale. Petitioner takes unusable ties to a disposal facility. Petitioner makes no
change in the nature, shape, or form of these ties. Petitioner segregates its steel scrap. Some is
inventory for sale and some is recycled and sold as scrap. These activities do not constitute

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Sales Tax
December 29, 2006

production of tangible personal property for sale by processing for purposes of section
1115(a)(12).
It should be noted that persons engaged in the processing of scrap material for sale may
be considered as being engaged in processing within the meaning of section 1115(a)(12) of the
Tax Law (Lindemann Recycling Equipment, Inc., Adv Op Comm T & F, January 31, 1989,
TSB-A-89(3)S). However, merely sorting scrap steel and railroad ties into saleable lots as
described in this Advisory Opinion is not processing as contemplated by section 1115(a)(12) of
the Tax Law. Therefore, Petitioner’s skid steers and front end loaders, or any other machinery
and equipment, used for such activities do not qualify for the exemption provided under section
1115(a)(12).
Petitioner also assembles new railroad ties with plates and spikes. Depending on the
contract, Petitioner may purchase ties that it will assemble and resell or Petitioner may assemble
ties provided to it for such purpose by a customer. Petitioner's assembly of railroad ties
furnished by the customer is a service the receipt for which is subject to sales tax under section
1105(c)(2) of the Tax Law unless the service is purchased by the customer for resale.
Petitioner's assembly of railroad ties it has purchased for resale constitutes the production of
tangible personal property for sale for purposes of section 1115(a)(12) of the Tax Law.
Likewise, Petitioner's assembly of railroad ties furnished by its customer qualifies as production
of tangible personal property for sale if Petitioner's customer intends to resell the railroad ties as
such. Accordingly, machinery or equipment used directly and predominantly (more than 50%)
by Petitioner in assembling ties for sale qualifies for exemption from sales and use tax. It is
further noted that the assembly of railroad ties furnished by a contractor who intends to install its
assembled railroad ties as a capital improvement does not qualify as production of tangible
personal property for sale. See O. W. Hubbell & Sons, Inc., Adv Op Comm T & F, September 2,
2004, TSB-A-04(22)S.
Parts, tools, and supplies used directly and predominantly in the production of tangible
personal property for sale are also exempt from sales and use tax. See sections 1105-B and
1115(a)(12) of the Tax Law.
Petitioner processes concrete using a material handler and rock crusher, creating a
product that can be sold as crushed stone. This machinery or equipment is used to effect a
change in the nature, shape, or form of the concrete, changing large pieces of concrete into a
usable product, i.e., crushed stone. Petitioner sells the resultant crushed stone.
In order to qualify for the exemption from sales tax granted under section 1115(a)(12) of
the Tax Law, the material handler and rock crusher must be directly and predominantly engaged
in the production of tangible personal property for sale. Petitioner's material handler and rock
crusher processes concrete into crushed stone. Thus, Petitioner's material handler and rock
crusher are used directly in an activity that qualifies pursuant to section 1115(a)(12) of the Tax
Law and section 528.13(c)(1) of the Sales and Use Tax Regulations. However, to be exempt, the

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Sales Tax
December 29, 2006

material handler and rock crusher must be used predominantly to process tangible personal
property for sale as required by section 1115(a)(12) and section 528.13(c)(4) of the Sales and
Use Tax Regulations. See Vigliotti Recycling Corp., Adv Op Comm T & F, December 24, 1990,
TSB-A-90(58)S.
Petitioner's skid steer and front end loader may be used to load concrete into the rock
crusher. This activity qualifies as a production activity. See section 1115(a)(12) of the Tax Law
and section 528.13(b)(1)(ii) of the Sales and Use Tax Regulations. However, this machinery and
equipment is also engaged in the unloading of scrap materials from Petitioner's trucks, the
sorting of scrap materials into usable and unusable materials in Petitioner's yard and the loading
of recycled materials onto trucks for distribution. These other activities do not occur during the
production of tangible personal property for sale. Therefore, Petitioner must establish that its
skid steers and front end loaders are used predominantly in the production of tangible personal
property for sale to be eligible for exemption pursuant to section 1115(a)(12) of the Tax Law.
At railroad construction sites, Petitioner uses its boom trucks to pick up the construction
debris and either load itself or other trucks to transport materials over public highways to
Petitioner's yard. It is well established that motor vehicles that travel over public highways are
not used directly in production, but rather are used in transportation. See section 528.13(c)(2),
Example 7 of the Sales and Use Tax Regulations, and St. Joe Resources Co. v New York State
Tax Commn., 72 NY2d 943 (1988). Accordingly, Petitioner's boom trucks do not qualify for the
exemption from sales and use tax granted under section 1115(a)(12) of the Tax Law.
If Petitioner has paid sales tax on its purchase of a rock crusher, material handler, or any
other machinery or equipment that Petitioner can establish is used directly and predominantly in
the production of tangible personal property for sale, Petitioner may apply for a credit or refund
of the sales tax paid on such machinery and equipment. Such application should be submitted on
an Application for Credit or Refund of Sales or Use Tax, Form AU-11, and must be made within
three years of the date when the tax was payable by the vendor who collected the tax from
Petitioner. See section 1139(a) of the Tax Law.

DATED: December 29, 2006

NOTE:

/s/
Jonathan Pessen
Tax Regulation Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.